Chapter 27: Higher-Order Tail Moments in Asset-Pricing Theory

Abstract

In this chapter, we review the literature about the use of third- and fourth-order moments in finance, the main papers on asset pricing theory with higher-order moments, and the definitions of skewness and kurtosis in the statistical literature. Contagion, skewness and kurtosis investor preferences, and tail regimes are some of the topics discussed in this chapter. We derive theoretical results about the higher-order moments of the bivariate truncated normal distribution, and analyze the implications of the results for previous empirical tests. We provide these results as a tool to be used in the empirical testing of asymmetries and heavy-tailedness of assets returns.

Keywords: Higher-Order Moments, Tail Moments, Asset Pricing, Exceedence Correlation, Financial Crisis Modeling

JEL Classification: G12

Link: https://www.worldscientific.com/doi/abs/10.1142/9789813236653_0027